Credit scoring is a big deal these days. If you don’t have good credit, you can end up unable to qualify for a mortgage, or unable to get the best interest rate on a car. You might even end up paying more for insurance if you have poor credit.
On top of that, it’s important to note that having no credit history can be just as bad as (or worse than) having a bad credit history. If you don’t have a credit history, it doesn’t matter how responsible you are with money; you are likely to have difficulty qualifying for a mortgage or getting the best interest rates on other types of loans.
If you don’t have credit, and you aren’t interested in borrowing (including getting a credit card) just to establish your credit history, it seems as though you could be missing out, from being approved for the best rental unit to saving money on financial products and services.
Alternative Credit Scoring
Now that some consumers are a little concerned about credit scoring industry, there have been moves to introduce alternative scoring methods.
Traditional credit scoring looks mainly at loans, and registers non-loan accounts, like utilities and rent, only when there is something negative to report. If you don’t borrow, you are unlikely to establish a good credit history. However, many providers of financial products and services -- even those that aren’t loaning you money -- view your credit history as a report on your level of fiscal responsibility.
Alternative credit scoring works to change this. Alternative credit reporting agencies will look at your rental payments, insurance payments, utility payments, and other regular obligations to help rate your level of financial responsibility. There is no credit required to make this work.
However, most alternative credit scoring require that you provide them with your account information so that they can verify it. In many cases, unless you can convince your landlord or utility company to report your payments, the alternative scoring company has to verify your accounts manually. This means you usually have to pay for the check to take place.
Do Alternative Scoring Models Matter?
While alternative scoring is a nice idea, the reality is that it doesn’t matter that much. Many of the companies that offer alternative scoring work with partners that offer their services. This means that you are limited in terms of options, since your alternative score is only good at specific lenders. It’s also important to note that your report might not be “good” beyond 30 or 60 days, since your payment information isn’t recent, and the company has to re-obtain your information to make a new report.
Some major players are starting to add alternative elements to their scoring models, though. The FICO Expansion score includes bank account information and other items not usually included in traditional scores, and Experian has started considering rent payments. However, alternative scoring is still relatively new, and for many consumers it doesn’t matter that much.